Starbucks Terminates HRO Contract With Convergys

In a March 13 analyst presentation, John Gibson, president of Convergys’ employee care business, announced that the two companies had mutually agreed to terminate the contract because of “Starbucks’ shifting priorities to focus on short-term initiatives unrelated to HR management.”

Gibson’s presentation cites a quote attributed to Starbucks saying, “The decision to discontinue the contract was made based on the changing needs of the business and in no way reflects on the quality of the work Convergys has done for Starbucks.”

Starbucks had signed the multi-year HRO agreement with Convergys in July. Under the deal, the Cincinnati-based HRO provider was to handle HR administration and payroll for all of Starbucks’ employees in Canada and the U.S. and take over benefits administration for the company’s Canadian workforce. While terms of the deal were not disclosed, analysts estimated it to be valued at $350 million to $400 million.

But since July, Starbucks has focused its efforts on reviving the company, which saw its stock plummet 50 percent during 2007. In January, chairman Howard Schultz took back his former role as CEO, replacing Jim Donald, to lead the company’s turnaround.

It seems that Starbucks wants to focus its HR staff on Schultz’s initiatives to transform the company, rather than have them busy with implementing the HRO contract, says Phil Fersht, the research director who covers HRO at AMR Research.

“Given that the deal was just announced eight months ago, not enough time had passed for something to have failed,” he says.

According to the Convergys presentation, the HRO provider had completed the blueprint on time and on budget for the deal, but it was unclear how much in penalties Starbucks paid to get out of the contract.

That phase of the work “was completed on time, and Convergys was paid for the work,” says Jeff Hazel, a spokesman for Convergys. Starbucks will remain as a client for Convergys’ customer management services, he added.

Convergys is not restating its profit guidance for 2008 and 2009. Calls to Starbucks were not immediately returned.